There’s a lot of bad economics news breaking now (for example, the big Stock Market drop and more predatory loan stuff, this time about Washington Mutual and Fannie Mae), but some of the best realworld economics punditry was in Counterpunch yesterday. For example, don’t miss Welcome to Year 27 of the Reagan Revolution. There, Mike Whitney concludes by tearing into the fundamental problem, that U.S. economic policy for decades has been a Reagan2Rubin anti-Keynesian ‘free market’ madness:
Is it possible that anyone with a pulse and a minimal ability to reason couldn’t see the inherent problems of building a financial edifice on the prospect that millions of first-time homeowners with bad credit history and no collateral would pay off there mortgages in a timely and responsible manner?
No. It is not possible. The real reason that the subprime swindle mushroomed into an economy-busting monster is that the markets are no longer policed by any agency that believes in intervention. The pervasive “free market” ideology rejects the notion of supervision or oversight, and as a result, the markets have become increasingly opaque and unresponsive to rules that may assure their continued credibility or even their ability to function properly.
The “supply side” avatars of deregulation have transformed the world’s most vital and prosperous markets into a huckster’s shell-game. All regulatory accountability has vanished along with trillions of dollars in foreign investment. What’s left is a flea-market for dodgy loans, dubious over-leveraged equities and “securitized” Triple A-rated garbage.
Let’s hear it for the Reagan Revolution.
What is striking is how the new “structured finance” paradigm replicates a political system which is no longer guided by principle or integrity. It is not coincidental that the same flag that flies over Guantanamo and Abu Ghraib flutters over Wall Street as well. Nor is it accidental that the same system that peddles bogus, subprime tripe to gullible investors also elevates a “waterboarding advocate” to the highest position in the Justice Department. Both phenomena emerge from the same fetid swamp.
Whitney also quotes Paul Volcker’s recent summation of the American dilemma, which hangs on foreigners’ willingness to keep investing in the U.S. (and its dollar) when many of the major players here seem only to have bad debt for sale:
“Altogether, the circumstances seem as dangerous and intractable as I can remember. Boomers are spending like there is no tomorrow. Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security. As a Nation we are consuming about 6 per cent more than we are producing. What holds it all together? – High consumption – high leverage – government deficits – What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 billion per day.” The nation is facing “huge imbalances and risks.”
Nearly as good Whitney is the excellently subtitled The Toxic Giant and It’s Own Black Hole by Pam Martens, on the history and probably criminal shenanigans of Citigroup (headed by Clinton Treasury Secretary Robert Rubin), who are huge in subprime doodoo right now. Martens first notes that ‘the Street’ is saying no to a U.S. Treasury Department bailout of subprime lenders that would involve buying worthless repackaged bad debt (true says the BBC), but then she gets into the meat of her essay, the smelly history of Citigroup:
Citigroup’s ignoble beginning foreshadowed its sorry state today. It is the Frankenbank created back in 1998 out of the body parts of Travelers Insurance, Salomon investment bank, Smith Barney brokerage, and retail banking giant Citibank, with the brain of Wall Street titan, Sandy Weill, implanted firmly to run a confidence game of unprecedented proportions. (Mr. Weill retired from the firm a few years ago after it made him a billionaire.)
Back in June 28, 1996, Martens made the following statement at a Federal Reserve Bank of New York hearing considering the repeal of Glass-Steagal and the merger of Citibank with a stock brokerage and an investment bank:
“It is amazing how soon we forget. It was just 60 years ago that 4,835 of America’s banks went broke and closed their doors, leaving shareholders and depositors destitute. The underlying reason that this happened was the lack of moral courage by our regulators and elected representatives to just say no to powerful money interests. Instead of just saying no, Washington handed the banks the equivalent of an ATM card to the Fed’s discount window to speculate in stocks [exactly what both Whitney contends the Treasury departmen is doing today] … We also want to remember that the political dynamics that created the backdrop for the banking meltdown in the ’30s grew from a corrupt, cozy culture between Wall Street and Washington … We can hardly look to the safekeepers of the public trust when they are falling over themselves to reap campaign windfalls from Wall Street. Washington and regulators are quick to criticize moral hazard when it is on foreign shores. Let’s look at the moral hazard incubating at Travelers and Smith Barney. In 1996, when the SEC and the Justice Department found that Smith Barney was one of 24 firms fleecing their own customers through six or more years of price fixing, no one went to jail. Within the last two years, when a special prosecutor found that Smith Barney had bribed the former U.S. agricultural secretary, again, no one went to jail. The firm is currently under investigation by various municipalities for the fraudulent markup of treasury securities . . .
Martens concludes on the predatory lending crisis, I mean the subprime lending crisis, with these comments:
The Bush administration would like to spin the current Wall Street crisis as the product of millions of hapless poor people with bad credit (“subprime”) defaulting on their mortgages. Thus, it’s been dubbed “the subprime mess” in headlines spanning the globe. That poor people were tricked into unconscionable mortgages predestined for foreclosure by a Citigroup subsidiary, CitiFinancial, and other predatory lenders, is but a symptom of the real disease and crisis. [Not just here, similar predatory lending is big in Britain too, the BBC reports.]
The Citigroup debacle rises from the same ideology creating endless reports on failures of Federal agencies to perform their oversight roles in protecting the American people with the taxes we give them to do just that. Viewed collectively, one can only conclude that the Bush administration has reengineered these taxpayer supported agencies to stand down on corporate malfeasance with a mantra of corporate profits before people and the flimsy overt pretext that free markets will handily function in the place of regulators with subpoena power.
After millions of lead paint infested toys slipped by the Consumer Product Safety Commission, dangerous drugs were rubberstamped by the Food and Drug Administration (FDA), (only to be recalled after hundreds of thousands of injuries, including death), FEMA, the Department of Defense and Attorney General’s office discredited for political cronyism, along comes the Citigroup hubris as the poster child crying out for timely enforcement of rules and regulations.
For me this all goes back to the amazing fact that FDR and the New Deal invented a damn good way of regulating our economy, which produced the best social and economic era in our nation’s history, 1946 to 1973. (Glass-Steagal banking regulations, for example, was obviously a socially and economically great idea.) But the right way to do things was abandoned in the 70s and 80s for what Keynes and his ideas had rightly replaced, neo-classical economics. In sum and once again, Fuck You Milton Friedman.
Also at http://politicalfleshfeast.com/showDiary.do?diaryId=1079
